"It's out of proportion. I don't believe anyone would accept this kind of rise... it's outrageous," he said.

"I think it's going to drive some of the important investors here in London away. If you put up VAT like that, people will run away to other countries like Japan, China... it's going to be harmful for the economy, definitely."

But Tony Norman, a telecommunications technical consultant, said the hike was fair and it made political sense.

The 53-year-old, from Henley-on-Thames in Berkshire, said: "Taxation has got to rise somehow hasn't it? They've got to get more money into the government, so we're going to end up paying it one way or the other.

"I guess the better off people are going to be buying more goods than the less well off, so they're going to pay more, so I think it's probably a fair way of doing it.

"I think politically the electorate are less likely to stomach income tax rises, it's been something the Labour party has always avoided and pledged to avoid.

"To be seen coming in as a new government and whacking it on income tax, from a political point of view, might not have been a good thing to do, which is why they've probably chosen VAT."

Critics of the rise, including acting Labour leader Harriet Harman, fear it will stifle growth and hit already hard-pressed small businesses.

One leather goods wholesaler from Bournemouth, who asked not to be named, agreed.

The 72-year-old said shops buying her Chinese-made leather belts, wallets and purses typically spent between £300 and £1,000 per order.

'Logistical nightmare'

"It will make a difference to them and they'll pass it on to the customer. Business will slow down a while," she said.

"It's bad news for small businesses who have been having a tough time anyway. This will not help."

Stephen Massey, a stockroom manager for a large clothing chain, said the VAT changes will be a "logistical nightmare" for those working in retail.

Image caption
Stephen Massey says many people struggle to understand how VAT works

Mr Massey, 38, from Berkhamsted in Hertfordshire, said when Labour cut VAT in November 2008, many shops put signs up explaining that actual prices were lower than ticket prices.

But when the tax rises, individual prices on each item will have to be changed because it is illegal to advertise an item for sale at a price which is lower than the actual amount to be paid.

He also said a lot of people would not understand that the tax was not levied on items classed as "essential".

"They're going to think it's going to hit them hard but I mean 2.5% on a weekly shop is not a huge amount of money, especially as it doesn't affect food, kids' clothes and the things you have to buy," he said.

"The perception would be that it's going to affect everything... people do not understand it."